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Entrepreneurs Relief – The Turning of The Tide

Entrepreneurs Relief – The Turning of The Tide

Over the years, when speaking to some clients and asking them about their existing pension provision, some have responded ‘my business is my pension’. This was always a fairly speculative position to take because there is no guarantee of being able to sell the business for what you believe it to be worth, or there being a demand to buy the business at the time you would like to retire.

Entrepreneurs Relief was certainly a benefit for this approach as the rules allowed business owners of two years or more to pay less Capital Gains Tax (10% rather than 20%), when they sell their business, up to a lifetime limit of £10million. However, in the Chancellor’s budget on 11th March 2020, he announced that he would be reducing the lifetime limit to £1million immediately with limited transitional arrangements.

How Does Entrepreneurs Relief Work?

To summarise, Entrepreneurs Relief results in a tax rate of 10% on the value of the sale of the business. There’s no limit to how many times you can claim, however, from 6th April 2020, you can only claim up to £1 million of relief during your lifetime.

You have to meet other criteria too for Entrepreneurs Relief to apply.

What does this mean?

Prior to the reduction, business owners could have had a primary focus, which was to grow the value of their business as much as possible prior to selling the business for as much as possible, possibly to retire?

Summary

The change in rules effectively means, business owners may now need to reconsider their options and start to take advantage of planning opportunities available to them in order to maximise the value they get out of their business now, prior to the eventual sale. Your options could include the following:

  • Maintain a ‘lifestyle’ business for the long-term;
  • Maximising pension funding;
  • Investing surplus capital; or
  • Paying a higher level of salary or dividends
    • Invest proceeds in a tax efficient manner
  • Using a core business to build a network of ‘family’ satellite businesses

If you are a business owner and you would like to know more about the changes in Entrepreneurs Relief and how this will impact you and your plans, please do not hesitate to contact us.

In the meantime, keep healthy and safe.

Carl Mitchell – DipPFS

IFA and Paraplanner

02/04/2020

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Reprieve for the Self Employed – With a sting in the tail?

Reprieve for the Self Employed – With a sting in the tail?

Our Chancellor Rishi Sunak outlined a rescue package that could help the majority of self-employed people over the next few months. These are the basic details:

Self-employment Income Support Scheme

UK Chancellor Rishi Sunak announced yesterday evening help for the self-employed at the daily Government briefing. Here are the details:

What is it?

The Government’s new Coronavirus Self-employment Income Support Scheme is open to those who were trading in the last tax year and are planning to continue to do so. The scheme will be open to those with a trading profit of less than £50,000 in 2018-19, or an average trading profit of less than £50,000 for tax years 2016-17, 2017-18 and 2018-19. More than half of the taxpayer’s income needs to come from self-employment to qualify for the relief.

What help is available?

If a loss in income has been suffered due to the Coronavirus crisis, a taxable grant will be paid to the self-employed individual or partner, worth up to 80% of profits, and capped at £2,500 per month. The grant will be initially available for three months, payable in one lump-sum, and is anticipated to be paid at the beginning of June.

How do I claim the help?

The Chancellor said this will cover 95% of the UK self-employed population.

This is how it works:

  • HM Revenue and Customs (HMRC) will use existing information to identify those potentially eligible and will invite applications
  • The application form will require confirmation that eligibility requirements are met
  • Payment will be made directly into the recipient’s bank account, details of which will need to be confirmed on the application form
  • There is no need to contact HMRC now. Those potentially eligible will be contacted by HMRC directly

If a tax return for 18/19 has not yet been submitted the Chancellor has stated that there will be a four-week grace period to allow returns to be filed.

Sting in the tail?

Rishi Sunak went on to say (and I precis) that there would be a levelling of the contributions from self-employed people as they would enjoy similar benefits now to the employed during this crisis.  In fact, the self-employed are potentially better off as they are encouraged to carry on earning too in addition to claiming from the Self-employment Income Support Scheme.

What might this mean? I think the Chancellor was indicating that national insurance contribution levels could be increased.  Now there is a significant difference in what we pay:

Self-employed rates

  • Class 2 if your profits are £6,365 or more a year
  • Class 4 if your profits are £8,632 or more a year

You work out your profits by deducting your expenses from your self-employed income.

How much you pay

Class          Rate for tax year 2019 to 2020

Class 2         £3 a week

Class 4         9% on profits between £8,632 and £50,000

2% on profits over £50,000

Employee National Insurance rates (standard)

This shows how much employers deduct from employees’ pay for the 2019 to 2020 tax year.

Category letter £118 to £166 a week (£512 to £719 a month) £166.01 to £962 a week (£719.01 to £4,167 a month) Over £962 a week (£4,167 a month)
A 0% 12% 2%

Employer National Insurance rates (standard)

This shows how much employers pay towards employees’ National Insurance for the 2019 to 2020 tax year.

Category letter £118 to £166 a week (£512 to £719 a month) £166.01 to £962 a week (£719.01 to £4,167 a month) Over £962 a week (£4,167 a month)
A 0% 13.8% 13.8%

Different categories of employees pay different rates of national insurance, but the above employee and employer rates would be applicable to the majority.

You can see that if you combine the rates below £50,000.00 per annum earnings that employed people generate 25.8% contribution for the State in comparison to 9% for the self-employed.

 

 

 Summary

If you are currently trading as self-employed once we (the country) have recovered from COVID 19 you might need to consider how you trade.  Your options could be:

  • Increase your charges to cover the extra cost of national insurance
  • Earn less
  • Trade as a limited company

This is only my opinion but given the debate around self-employed national insurance for the last few years I think changes to self employed national insurance contribution rates are a likely outcome.

 

Steve Speed

27/03/2020

 

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A summary of the Autumn Statement 2016 for business owners.

A summary of the Autumn Statement 2016 for business owners.

£1bn broadband investment

Small businesses struggling with poor internet connections could soon be able to access a better connection after the chancellor announced, in the Autumn Statement 2016, an investment of more than £1bn into building out the UK’s digital infrastructure.
The Chancellor said the government would be pursuing improvements in speed, security and reliability. Additionally, 100 per cent business rate relief will be provided for the next five years when it comes to new fibre infrastructure.

National Living Wage increase

Employers with staff on the lowest legal wage will now have to pay more after The Chancellor revealed in the Autumn Statement 2016 that the National Living Wage, the replacement to the National Minimum Wage, will go up from £7.20 to £7.50 in April 2017.
Labour are planning for it to be £10 if the party comes back into power.
The tax-free personal allowance has also been increased, and will be £12,500 by the end of the current parliament.

Increase to Export Finance funds

Small businesses looking to engage with export activities will soon have access to better financial assistance. UK Export Finance, an organisation that aims to ensure that no viable UK export fails for lack of finance or insurance, is set to double in capacity.

VAT changes

The government is stopping what it called “inappropriate use” of the VAT flat rate scheme put in place to help small companies. The VAT flat rate scheme is an alternative way for small businesses to work out how much VAT to pay to HMRC each quarter.
Temp recruitment agencies have recently been accused of exploiting VAT rules that were originally designed to benefit very small businesses.
The government used the Autumn Statement 2016 to introduce a new 16.5 per cent rate from 1 April 2017 for businesses with limited costs, such as many labour-only businesses. This, they hope, will maintain the accounting simplification for the small businesses that use the scheme as intended.

Letting fees

The government will be banning letting fees for private tenants “as soon as possible” after they have risen considerably despite attempts at regulation attempts. This could hit private buy-to-let investors who may find that they have to pick up this cost.

Business rates

The chancellor announced in his Autumn Statement 2016 speech that the doubling of rural business rate relief – completely removing the burden of business rates – would bring a “well-needed” tax break to small businesses that are the “lifeblood of their communities”.
Increasing rural business rate relief to 100 per cent is expected to save qualifying businesses up to £2,900 every year in business rate payments.

 

If you’ve got any queries regarding the planned changes, please contact us.

olivia 4,354 Comments

Property Fund Suspension

Following the recent vote to leave the EU there has been a wave of property funds being suspended from multiple providers. Nearly £18 billion of assets have been frozen within the funds that have temporarily seized trading. The decisions to suspend property funds have been made by each provider to protect shareholder’s interests by avoiding having to make heavily discounted sales. Read more

olivia 3,740 Comments

EU Referendum Investment Update

We voted to leave the EU by a majority and the markets are reacting with some volatility.  Sterling and the FTSE are down and global markets are also reacting.

History and experience has taught us that at times of severe volatility you need to remain invested in the markets, now is not the time to switch out of your investments as you will probably only crystallise losses. Read more